Treasurer Reports Funds Performed Better Than Expected, But Challenges Remain
HARTFORD, CT – Connecticut’s pension funds performed better than expected in the most recent fiscal year, showing double-digit returns even as the state continues to play catch-up with its massive unfunded pension liabilities.
The state’s pension fund showed returns of 11.5% for the fiscal year ending on June 30. The fund has outpaced projections over the last two fiscal years. The State Treasurer’s office assumed a rate of return of 6.9%. In fiscal year 2023, the fund showed returns of 8.5%.Overall, total assets within the fund increased by $6.7 billion, aided by $1.9 billion in excess contributions from the state’s fiscal guardrails.
Connecticut has almost $40 billion in unfunded pension liabilities, and nearly $90 billion in unfunded liabilities when retiree healthcare benefits are added.
“Strong investment performance is a critical component to Connecticut’s overall financial success,” said state Treasurer Erick Russell. “Generating returns above our assumed rates of return, like we have the past two years, guards against the impact of future down markets and accelerates the speed at which we can pay down legacy pension debt inherited by the current generation of Connecticut taxpayers. It reduces the required State contributions that must be budgeted for each year, saving taxpayers money immediately and in the future. As importantly, the retired teachers and state workers that earned a dignified and secure retirement through decades of vital public service can see the benefit of the work being done on their behalf in my office and across state government.”
Gov. Ned Lamont said that he was pleased to see continued improvement in the pension fund’s performance
“That progress, coupled with the smart fiscal decisions we’ve made with the legislature to address our long-underfunded pension system, is saving Connecticut taxpayers hundreds of millions of dollars annually and is enabling us to make significant investments in programs that impact working families like expanding access to childcare, building more housing, and fixing our aging roads, bridges, and highways,” he said.
Russell also announced Tuesday that $608.2 million in surplus revenues over and above the state’s volatility cap were deposited into the pension funds for retired teachers and state workers. The revenues were split proportionally according to outstanding unfunded liability, resulting in an approximately 55/45 split.
Russell’s office reported that $335 million had been deposited into the State Employees Retirement System (SERS) and $273.2 million had been deposited into the Teachers Retirement System (TRS). Another payment of about $327.6 million is expected later in the year, when the state’s operating surplus is certified.
The state’s Fiscal Guardrail statute says the Budget Reserve Fund (BRF), also known as the Rainy Day fund, cannot exceed 18% of net General Fund appropriations for the fiscal year, and any additional funds are to be transferred to the State Employees’ Retirement Fund and/or Teachers’ Retirement Fund in the fall once the state’s books are audited and closed for FY2024. The surplus funds came from the state’s volatility cap, which captures funds from especially volatile sources of state revenue and deposits them directly into the BRF.
The positive news about state pension returns comes within the context of the massive unfunded pension liabilities hanging over Connecticut’s finances. A report by the Yale School of Management released last year showed that decades of mismanagement had made Connecticut’s pension fund one of the worst performing in the nation.
A separate report from the Center for Retirement Research at Boston College, published in 2022, laid out several reasons for Connecticut’s pension problems, including inadequate contributions, incorrect assumptions about demographic changes and investment returns, and increases in benefits.
Connecticut is not alone, as unfunded pension liability is a major concern across the nation. Researchers with the Pew Charitable Trust found that although states have made gains in closing the gap between promised benefits and the money set aside to pay them, the shortfall still comes to $836 billion as of fiscal year 2021. That’s almost half of the states’ own-source revenue, and a 14.4% increase since FY 2007.
Even in an overall poor fiscal outlook though, Connecticut’s performance relative to other states still places it near the top of states facing huge burdens. Connecticut is third on the list of states with the largest unfunded pension liability, with the burden standing at 136% of the state’s own-source revenue as of FY 2021. Connecticut is fourth in the nation in terms of unfunded retiree health care liabilities as a share of own-source revenue, at 103.2% as of FY 2019. Finally, Connecticut is second in terms of debt as a share of own-source revenue, standing at 72.1%.